SOS Educational Webcast: The Spin Cycle: Don t Let Your Transaction Fade

Transcription

1 SOS Educational Webcast: The Spin Cycle: Don t Let Your Transaction Fade Sorrell Johnson, CEP, Stock & Option Solutions, Inc. Julie Kenia, CEP, Stock & Option Solutions, Inc.

2 Disclaimer The following discussion and examples do not necessarily represent the official views of Stock & Option Solutions, Inc., with respect to any of the issues addressed. Moreover, this presentation and the views expressed by the individual presenters should not be relied on as legal, accounting, auditing, or tax advice. The outcome of any individual situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of the relevant literature in effect at the time. Anyone viewing this presentation should not act upon this information without seeking professional counsel and/or input from their advisors.

3 Materials Slides 3

4 Agenda What is a spin-off? What happens to equity awards? Spin Team Complications for Equity Administrative Issues International Compliance Issues Accounting Issues Shareholder Issues The Importance of Communications 4

5 What is a spin-off? Securities and Exchange Commission: What is a Spin- Off? In a spin-off a parent company distributes shares of a subsidiary to the parent company s shareholders. Original Company (WholeCo) RemainCo/NewCo SpinCo (new company) 5

6 What is a spin-off? (con t) Form 10 SpinCo files Form 10 (and amendments) to register shares Record Date Establishes shareholders entitled to dividend of SpinCo shares Spin Date Date on which RemainCo and SpinCo separate. SpinCo becomes an independent company. Trading in public market likely to begin on this date. Distribution Date Date on which SpinCo shares are deposited in shareholder s account

7 What happens to equity awards? Separated/Concentrated/Employment Approach Employees receive equity awards only in company of final employment Basket/Bucket/Portfolio/Shareholder Approach Employee receives equity awards in both RemainCo and SpinCo, regardless of employment Hybrid approach Some combination of both approaches, possibly unvested awards in Separated Approach, vested awards in Basket Approach

8 Spin Team Board of Directors External compensation consultants Legal Counsel (internal and external) Management Finance Tax department Human Resources Stock Administration Auditors (external and internal)

9 Complications for Equity Changing vendors/providers Transfer agent Stock administration systems Broker Where is the employee s stock history? Tax considerations for reporting Bulk transfer of shares? Timing? Positive or negative consent? ESPP shares tracking dispositions Long shares ISO tracking, convenience Cash distribution along with stock? Any planned RIFs?

10 Complications for Equity (con t.) Equity plan amendments, creation RemainCo generally no change SpinCo new plans must be established, usually by sole shareholder (parent company) immediately prior to spin-off Will new award agreements be required for both RemainCo and SpinCo? Required acceptance or informative only Section 16 filing for SpinCo Required at spin

11 Complications for Equity (con t.) Equity adjustment rules who owns the decision making process? External and Internal sources may have responsibility for developing the actual adjustment rules, formulas May change many times prior to finalization immediately prior to spin date Need to make sure it is not taxable to participant when possible no benefit provided with adjustment Who will be responsible for providing final formulas and rules to stock administration and/or vendor performing adjustments Set process in place and timelines to ensure correct data is passed in a timely manner

12 Administrative Issues Record/Spin/Distribution Date creep: possible regulatory delays Don t expect weeks of notice, it just happens What happens to the ESPP? RemainCo usually no changes SpinCo employees are generally removed from RemainCo purchase if purchase is happening after spin date, new plan may not be effective for some period post-spin SpinCo stock administration team when will they be put in place Training needed if new, need to understand historical data and spin impact Who will perform the spin-off adjustments? Equity vendor may provide service or contract with other service providers

13 Administrative Issues (con t.) Performance Awards payout or adjust performance metric RemainCo employees generally no impact SpinCo employees may have award paid out or converted Data considerations Converted awards: Rounding rules for prices and shares Flags for accounts and grants (user fields) Grant number for converted grants prefixes? What will SpinCo display for employees entire history or just SpinCo data? Who signs off on final converted data? Testing don t assume the adjustments will work correctly, know the issues and develop a plan of attack

14 Administrative Issues (con t.) Employee tax rates and payroll reporting, if using Basket approach Where will rates come from? How will payroll receive income/tax withholding details? How will tax dollars be passed between companies? Linkage between stock administration teams is vital Blackout? When and for how long? Company imposed vs. vendor requirement RIF employees: treated as RemainCo or SpinCo? Reverse split for RemainCo?

15 International Compliance Issues Although adjustments may be tax neutral in the US, they may not be in other countries Who pays for additional employee cost Timeline for country specific review and approval of adjustments and SpinCo plans Vacation/Holiday Periods Local legal experts, works councils, tax experts, etc. all need to be involved Tax qualified plans need to review for retaining qualified status or obtaining new approvals UK, France, Israel China SAFE SpinCo cannot start process until spin date Approval can take 3-12 months how will equity be handled during this time Cash payments to employee shareholders Payroll, transfer agent or accounts payable

16 Accounting Issues Does WholeCo have performance awards? How are these treated for 162(m) purposes? Will the adjustment/conversion of the outstanding awards create incremental expense for either RemainCo or SpinCo? Can the stock administration system track the incremental expense or will it need to be tracked manually on a spreadsheet? Non-employee vs. employee considerations if basket/shareholder approach Is the Spin Date a month end or quarter end? How will the financial reporting for RemainCo and SpinCo be handled?

17 Shareholder Issues Roadshow for RemainCo or SpinCo? Is the distribution a tax neutral event for US residents? International residents? Will tax supplements be drafted for international shareholders? Remember, international employees are shareholders too. Cost basis advice: Where will it be posted? Distribution of cash? How? In what currency?

18 The Importance of Communication Repeat, remind, repeat, remind. Use successive communications as building blocks. Use care to not provide exact calculations too soon sets expectations that are difficult to change Different populations have different concerns: consider some directed communications: 10b5-1 plan holders, executives Equity in offer letters, pre spin: how many shares do employees really receive? Blackout: Ample notice, especially for optionholders How are vestings treated? How long?

19 Questions? 19

20 Contact Information Sorrell Johnson, CEP Senior Equity Compensation Consultant 910 Campisi Way, Suite 2E Campbell, CA USA Bus: (408) Julie Kenia, CEP Senior Equity Compensation Consultant 910 Campisi Way, Suite 2E Campbell, CA USA Bus: (408)